## Facts

- U.S. Metals manufactured and sold approximately 350 weld-neck flanges to ExxonMobil for installation in high-temperature, high-pressure refinery units.
- The flanges were welded into piping systems and covered with specialized coating, insulation, and related components (including gaskets).
- During testing, several flanges leaked; ExxonMobil concluded the flanges were defective and nonconforming to ASTM standards.
- To avoid safety risks, ExxonMobil shut down the units and replaced all U.S. Metals flanges; removal required cutting out welded flanges and resulted in destruction/damage to surrounding coating, insulation, and gaskets.
- ExxonMobil sued U.S. Metals seeking (1) costs to cut out and replace the flanges and related work and (2) “downtime” damages for loss of use during shutdown; the dispute later settled.
- U.S. Metals sought defense and indemnity under a commercial general liability (CGL) policy issued by Liberty Mutual; Liberty Mutual denied coverage.
- In ensuing coverage litigation, federal courts requested guidance on Texas law, leading to certified questions to the Texas Supreme Court focused on whether there was “property damage” and how the impaired-property exclusion applied.

## Issues

1. Whether “physical injury to tangible property” occurs merely when a defective component is incorporated into a larger system.
2. Whether physical damage caused by cutting out and replacing defective flanges constitutes covered “property damage.”
3. Whether the CGL policy’s impaired-property exclusion bars coverage for replacement costs and loss-of-use (downtime) damages tied to the refinery units and flange replacement.
4. Whether the impaired-property exclusion also bars coverage for costs to replace insulation and gaskets destroyed during the replacement process.

## Decision

- The court held that mere incorporation of defective flanges into refinery units, without tangible, manifest harm, did not constitute “physical injury to tangible property.”
- The court held that the cutting out and removal process physically damaged other tangible property (including coating, insulation, and gaskets), constituting “property damage.”
- The court held that the impaired-property exclusion barred coverage for (a) costs to cut out and replace the flanges and (b) downtime/loss-of-use damages for the refinery units.
- The court held that the impaired-property exclusion did not bar coverage for the cost to replace insulation and gaskets that were physically destroyed during remediation.

## Legal Principles

- “Physical injury to tangible property” requires tangible, manifest harm; a defective component’s installation, by itself, is not physical injury.
- Physical injury can arise from remedial work when removal/replacement of the insured’s product causes direct damage to other property.
- The impaired-property exclusion applies to property that is unusable or less useful because it incorporates the insured’s defective product, when the property can be restored by repair, replacement, adjustment, or removal of that product.
- Under the impaired-property exclusion, costs to replace the insured’s defective product and loss-of-use damages tied to restoring the integrated system’s function are excluded.
- The impaired-property exclusion does not apply to distinct collateral property that is directly and physically injured (and not merely “restored” by replacing the defective product), such as insulation and gaskets destroyed in the replacement process.

## Conclusion

The court limited CGL coverage by holding that installing a defective component does not, standing alone, cause covered “property damage,” and that the impaired-property exclusion bars most replacement and downtime claims for the integrated system; however, it preserved coverage for separate, collateral physical damage to items like insulation and gaskets destroyed during remediation.


U.S. Metals, Inc. v. Liberty Mut. Grp., Inc., 490 S.W.3d 20 (Tex. 2015)